Taiwan’s Dollar Declines to Five-Year Low as Overnight Rate Cut

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Taiwan’s dollar fell to a five-year low as the central bank eased monetary policy to spur economic growth and China slashed the yuan’s fixing by the most on record.

The island’s sovereign bonds surged after the monetary authority cut the interest rate on overnight certificates of deposit on Tuesday to 0.386 percent from 0.388 percent at the previous sale, the first reduction in three years, according to people familiar with the matter. It came after second-quarter growth slowed to the least since 2012 and as China weakened the yuan’s reference rate by 1.9 percent on Tuesday.

“Lowering the overnight rate is a loosening move,” said Cindy Yu, an economist at Taipei Fubon Commercial Bank Co. “Taiwan’s move will also help weaken the currency, especially after China’s central bank weakened the yuan’s fixing so drastically to save Chinese exports.”

Taiwan’s dollar dropped 1 percent to NT$32.080 against its U.S. counterpart, the weakest close since August 2010, according to Taipei Forex Inc. One-month non-deliverable forwards plunged 2 percent, the most in 16 years, to NT$32.339.

The yuan fell 1.8 percent in its biggest one-day loss since China unified official and market exchange rates in 1994. A weaker yuan will put downward pressure on other Asian currencies, said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd. in Singapore.

Effective Cut

Taiwan’s economic growth slowed to 0.64 percent last quarter, from 3.37 percent in the first three months of the year, a report showed July 31. That fueled speculation the central bank will cut its benchmark rate, which it has held at 1.875 percent for the past four years.

The yield on the sovereign bonds due March 2025 dropped eight basis points, the most for benchmark 10-year notes since September 2011, to 1.299 percent, Taipei Exchange prices show. The five-year yield fell five basis points to 0.869 percent.

The one-day certificates of deposit are sold by the central bank daily to adjust cash supply and the rates and volumes aren’t released publicly.

“I don’t expect Taiwan’s central bank to adjust the discount rate in the short term, but lowering the overnight rate is effectively a rate cut,” said Baker Tu, a bond trader at Capital Securities Corp. in Taipei.

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